Flow down provisions are prevalent in construction contracts. Essentially, a flow down provision is a term of a subcontract that attempts to incorporate the terms of a contract up the chain into its own terms. Two of the most common flow down provisions, which are also two of the more common topics on the blog, are pay when paid and pay if paid clauses. A pay when paid provision works as a time shifting device, moving the time that payment is due according to when the party up the chain has gotten paid. A pay if paid provision, however, attempts to create a condition precedent – if the party up the chain is not paid, then that party has no duty to pay the lower tiered party.
Courts handle each flow down provision differently. Recently, the Virginia Supreme Court declined to enforce a flow down provision when a contractor attempted to side step the statute of limitations on a Virginia public project.
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The case at hand, Hensel Phelps Construction Co. v. Thompson Masonry Contractor, Inc., occurred all the way back in 1997. Virginia Tech hired Hensel Phelps as general contractor on a construction project. The contractor, in turn, subcontracted Thompson Masonry, among others. The project was finished in 1998, though some repair work continued into the year 2000. In 2012, Virginia Tech brought a claim against Hensel Phelps for defective work.
This is probably a good time to establish that Virginia has a five-year statute of limitations period for a written contract of this type. The contract was completed in 1998, a cool 14 years before Virginia Tech brought suit. Even based off of the final repair date in 2000, this case was brought far beyond the five-year statute of limitations. However, in Virginia, contracts for the benefit of the public are not restricted by any statute of limitations period. Because Virginia Tech acted as an agent of the Commonwealth, it was not barred from bringing suit against Hensel Phelps. The contractor settled with Virginia Tech for $3M and then filed suit against its subcontractors for indemnification.
Flow Down Provisions
Because the subcontractors were in contract with Hensel Phelps, rather than Virginia Tech, they argued that the five-year statute of limitations period applied. The trial court agreed with this reasoning and dismissed the contractor’s claim.
Hensel Phelps appealed, claiming that the subcontractors waived the statute of limitations under flow down provisions included in their contracts. The contractor also pointed to specific phrases in the subcontracts that clearly intend to waive the statute of limitations, such as: “[t]he Subcontractor is bound to the Contractor by the same terms and conditions by which Contractor is bound to [Virginia Tech] under the Contract,” and that the subcontractor’s warranty period covers any time “prior to Contractor’s release from responsibility to [Virginia Tech] therefor as required by the Contract Documents.”
The court did not agree. The court looked to precedent to define the term “waiver” as used in Hensel Phelps’ claims, coming up with “the intentional relinquishment of a known right, with both knowledge of its existence and an intention to relinquish it.” Hensel Phelps’ flow down provision included in its contracts did not meet that bar. Rather, the “waiver” that the general contractor relies on merely incorporates the terms of the prime contract by reference. While the court stated that a more specific waiver of the statute of limitations might be upheld, the flow down provision failed to constitute a waiver under Virginia law. Further, Hensel Phelps’ contract did not even include a waiver of the statute of limitations; the statute of limitations was inapplicable because Virginia Tech is a Commonwealth agency. This means that even if the contractor could have bound subcontractors to a waiver under a flow down provision, no provision of the prime contract would have waived the statute of limitations, anyway.
Depending on the situation, a flow down provision might be binding on a subcontractor. However, when that provision is ambiguous or creates a greater burden on the subcontractor than would ordinarily be expected, courts regularly decline to enforce a flow down provision, just as this court did with a pay if paid provision. But this is certainly no consensus- as we recently discussed, a New York court enforced a notice provision not included in the subcontract. Generally, though, an ambiguous flow down provision may not create the protection a general contractor is looking for. Hensel Phelps asked the court to enforce an indirect waiver of the statute of limitations for an indefinite amount of time. Had the contractor included more specific language regarding indemnification, they may have prevailed.
For more on Virginia construction law, head over to our Virginia Construction Payment Resources.